Supreme Court of Canada
Dickson v. Royal Bank of Canada, [1976] 2 S.C.R. 834
Date: 1975-12-19
Henry E. Dickson Appellant;
and
The Royal Bank of Canada Respondent.
1975: November 21; 1975: December 19.
Present: Judson, Ritchie, Spence, Dickson and de Grandpré JJ.
ON APPEAL FROM THE SUPREME COURT OF NOVA SCOTIA, APPEAL DIVISION
Guarantee and suretyship—Termination of guarantee—Right to determine liability by “notice in writing”—Sufficiency of correspondence as notice—Expression of “wish” or “preference”—Requirement that notice be explicit and unequivocal.
Appellant had executed the respondent Bank’s standard form of Guarantee and Postponement of Claim which provided that the guarantor might determine his liability in respect of future advances “by notice in writing”. After some discussions with respondent’s local manager a letter was sent to the Bank by appellant’s solicitor expressing appellant’s “firm wish that no additional funds be advanced” and indicating that the solicitor would like the guarantee withdrawn. The trial judge held that the conversations and correspondence effectively terminated the guarantee but was reversed by the Appeal Division.
Held: The appeal should be dismissed.
While a guarantor is not required to use any set form of words in exercising his right to determine his liability under a guarantee, commercial rights are not normally exercised by the mere expression of wish or preference. It is of first importance that the creditor should not be left in any doubt. A letter in equivocal terms does not constitute a determination of a guarantee and in such circumstances the creditor is justified in proceeding on the basis that the necessary notice has not been given.
APPEAL from a judgment of the Supreme Court of Nova Scotia, Appeal Division[1] reversing the judgment of Jones J.[2] at trial. Appeal dismissed.
Stewart Mclnnes, for the appellant.
D.R. Chipman, Q.C., and John Murphy, for the respondent.
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The judgment of the Court was delivered by
RITCHIE J.—This is an appeal from a judgment of the Appeal Division of the Supreme Court of Nova Scotia reversing the judgment rendered at trial by Mr. Justice Jones wherein he had held that certain letters and telephone conversations between the appellant and his then solicitor on the one hand and the Royal Bank of Canada on the other, were effective to terminate the appellant’s liability in accordance with the terms of a guarantee executed by him on the 11th of January 1965, on the Bank’s standard form of “Guarantee and Postponement of Claim” whereby he had guaranteed payment of
…all debts and liabilities present or future, direct or indirect, absolute or contingent, matured or not, at any time owing by Beinn Taobh Farms Limited to a limit of Thirty-Five Thousand ($35,000) Dollars.
When the guarantee was executed, the president and principal officer of the company in question was the son-in-law of the appellant and the appellant was himself an officer of the Company, but in 1967 divorce proceedings were initiated by the appellant’s daughter and the appellant then consulted a solicitor with respect to his position as guarantor; there ensued a series of negotiations in which both the appellant and the solicitor said that they were attempting to arrange the appellant’s discharge from the guarantee. The course of these negotiations and those that followed them have been carefully traced in the reasons for judgment of the learned trial judge which are now conveniently reported in 33 D.L.R. (3d) at p. 332 et seq. and I accordingly only find it necessary to set out such of them as have a direct bearing on the issues raised by this appeal.
The guarantee executed by the appellant provided in part:
(4) The undersigned or any of them may, by notice in writing delivered to the Manager of the branch or agency of the Bank receiving this instrument, determine their or his liability under this guarantee in respect of liabilities thereafter incurred or arising…
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It does not appear, however, that any notice in writing was given to the Bank during the year 1967 and although the company account was being actively operated on a revolving basis by the Bank, the first written indication of the appellant’s anxiety about the guarantee which the Bank received was in the form of a letter written by the solicitor on August 14, 1968 to the respondent’s manager in the Town of Middleton where the company’s banking was conducted. This letter was apparently written in reply to a letter from the local Bank manager to the appellant, dated July 18, 1968, which read, in part, as follows:
It is noted, however, that the line of credit of Beinn Taobh Farms Limited with the bank over the past year has been only $25,000. and since it is assumed that you would not wish your commitment or guarantee to exceed this amount, a form to replace the one for $35,000. now held is enclosed herewith which we would ask you to please sign where indicated…
The solicitor’s letter is set out in full at 33 D.L.R. (3d) p. 334 and the correspondence subsequently exchanged is to be found on the pages following. The solicitor’s letter opens with a reference to conversations which he had had with the Bank during the previous few months and continues in the following terms:
I have your letter of July 18th—greatly delayed no doubt due to the postal strike—in which you suggest Mr. Dickson might sign a new guarantee for $25,000., it being understood that there is an existing guarantee for $35,000. but that the amount of your advances are under $25,000.
I have no great objection in form to Mr. Dickson signing the new guarantee but see no particular advantage in him now doing so. As we have previously advised and as we now repeat, it is our firm wish that no additional fresh funds be advanced at any time and that all efforts be made to retire the obligation in its entirety.
We are equally concerned with the form of security. Our understanding is that among other you have the breeding stock on the farm but it would be helpful if you would let us have the amount of security held. This would be of particular assistance to us so that we could have it valued and from time to time appraise our position. If, as we regretfully conclude, the equity of the company is negligible, our client should be alert regarding the sufficiency of the security. It might well be to his
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advantage indeed if there is a potential loss involved that we should face up to the situation now rather than when it might become worse.
The penultimate paragraph of the letter reads as follows:
Frankly, I am concerned about the entire matter and would like Mr. Dickson’s guarantee withdrawn. Would you consider any alternative in which you would surrender his guarantee. If there is not, would you endorse the note and the security over to our nominee so that we could take such steps that we should deem expedient in what might be a worsening situation.
To the extent that this letter constituted notice to the Bank of the position taken by the appellant in relation to his continuing liability as guarantor, it gave notice of the fact that it was his “firm wish that no additional fresh funds be advanced at any time” and that his solicitor would like his guarantee withdrawn.
The central issue in this appeal is whether this expression of what the appellant “wished” and what his solicitor would “like”, when considered in the context of the other relations existing between the parties, constituted a notice of termination in accordance with the provisions of the guarantee executed by the appellant.
If, as the appellant contends and as the trial judge found, the letter which I have quoted terminated the appellant’s liability under the guarantee in respect of liabilities incurred by the Company after August 14, 1968, then the serious financial difficulties which culminated in the financial collapse of the Company by January 29, 1971, could not have been any responsibility of the appellant pursuant to his guarantee in respect of obligations incurred after August 1968.
The solicitor’s letter of August 1968 was answered by the Bank in a letter of September 18th, containing the following paragraph which explains the manner in which the Company’s account was being operated:
With regard to a renewal guarantee, it is not a matter of particular importance, but it occurred to us that for purpose of regularity Mr. Dickson might wish to replace the existing document by one for the lesser amount of $25,000. As you may know, it is a general banking
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practice to revolve loans secured under Section 88 of the Bank Act—that is when sales are made the proceeds are applied on such loans and when new money is needed for operating purposes, a new advance is made. To this extent fresh loans have been made from time to time to the subject account but it is understood, of course, that at no time will Mr. Dickson’s commitment under the guarantee exceed $25,000. Unless we hear from you to the contrary, we shall continue the practice of revolving the loans in question in the manner outlined above.
In respect of the last sentence of the above-quoted excerpt from the Bank’s letter, the learned trial judge found that “the Bank received a prompt response from Mr. Dickson and Mr. Kitz (his solicitor) with directions to terminate the loan”, but Mr. Kitz’ evidence, which the trial judge accepted, was as follows:
I repeated my position that Mr. Dickson did not want to continue any further on his guarantee as my letter of August 14th was to withdraw, to stop, to halt, the guarantee of which he was under.
I agree with Mr. Justice Cooper who observed in the course of the reasons for judgment which he delivered on behalf of the Appeal Division, that the “conversations of September 20, 1968 and September 23, 1968, …are only confirmatory of the letter and cannot add to, vary or contradict what was in it.”
The first paragraph of the Bank’s letter of September 18 which is reproduced in 33 D.L.R. (3d) at p. 335, makes it plain that the Bank was not treating the letter of August 14 as notice to determine the appellant’s liability under the guarantee, and I think it must be accepted that at least from the end of September, the appellant and his solicitor knew that the Company’s account was continuing to be actively operated on a revolving basis and yet, for some reason, no further steps appear to have been taken by or on behalf of the appellant, and there was certainly no written communication with the Bank, until August 20, 1969 when the solicitor wrote a letter which was received by the Bank on August 21 in which he stated:
When we spoke last year the loan was about $3,000.00 less than it is at the present time and you have advised that further advances have been made. I particularly refer to Sec. 4 of your Guarantee and would
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appreciate if you could advise me promptly of the extent of Mr. Dickson’s guarantee as requested from time to time.
I again repeat that it is the wish of Mr. Dickson that advances not be made on this guarantee and that it be liquidated as promptly as possible. It would also be appreciated if you could advise the rate presently being charged on the loan and your comments on the security held apart from the guarantee and the likelihood of the loan being retired in the near future.
It is interesting to note that a copy of this letter was sent to the supervisor of the Bank at its main branch in Halifax and the reaction of at least one member of the staff of that office is graphically portrayed in the note written at the bottom of the solicitor’s letter which accompanied his enclosure. That note reads: “Is guarantor determining his guarantee”? To clarify the matter Mr. Low of the Supervisor’s Department telephoned Mr. Kitz and asked him what was meant by his letter and his evidence reads in part:
…I, in the conversation, just said ‘Is the guarantee being determined?’ and he said ‘That is what we wish’.
This telephone conversation was followed by a letter from the Supervisor dated August 25, 1969, stating in part:
…It is our understanding Mr. Dickson wishes to determine the amount of his guarantee. We have instructed the branch to be guided accordingly and Mr. Larrabee will be corresponding with you further on this point and will be advising you of the actual amount.
The guarantee was determined as of August 22, 1969.
The final chapter in the story of the relationship of Mr. Dickson and the Company with the Bank is well described by Mr. Justice Cooper in the course of his reasons for judgment as follows:
From that time on the Bank financed Beinn Taobh on the basis of small loans which were met from the proceeds of the sale of stock. This continued until January 29, 1971 when Mr. Stewart advised Mr. Fry, who had on September 1, 1970 succeeded Mr. Larrabee as manager of the Middleton branch of the Bank, that he could not meet his obligations. On February 2, 1971 Mr. Fry demanded payment from Beinn Taobh. Steps were taken to dispose of the stock. This took some months
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and resulted in the recovery of $6,233.19 and an additional $1,000.00 was obtained through a Government subsidy. It was admitted that Beinn Taobh owed the Bank $24,700.00 on August 22, 1969. Demand for payment was duly made by the Bank on Mr. Dickson in the sum of $18,466.81 with interest, pursuant to the guarantee.
As I have indicated, the governing consideration which must be decisive of this appeal is whether the letter of August 14, 1968, viewed in light of the surrounding circumstances, constituted notice which was effective to determine the appellant’s liability under his guarantee in respect of “liabilities thereafter incurred” by the company.
A guarantor is not in my view required to use any set form of words in exercising the right to determine his liability under such a guarantee and reference to s.4 of that document does not appear to be an essential ingredient of such a notice, but commercial rights are not normally exercised by the mere expression of a wish or preference and where, as here, it was obviously of first importance that the Bank should not be left in any doubt, I do not consider that the equivocal terms of the letter in question constituted a determination of the guarantee and, in my view, the Bank was fully justified in proceeding on the basis that the necessary notice had not been given. I can find no evidence in the correspondence and the accounts of telephone conversations prior to August 20, 1969 which can be taken as strengthening the position taken, on behalf of the appellant, in the original letter.
Having found that the guarantee was determined by the letter of August 14, 1968, the learned trial judge went on to find that Mr. Dickson should be given credit for payments received on the account between that date and August 20, 1969. As I agree with the Court of Appeal that the guarantee was not effectively determined until August, 1969, I adopt the following excerpts from the reasons for judgment of Mr. Justice Cooper:
There were sufficient payments received between August 14, 1968 and August 20, 1969 to retire any liability existing when the letter of August 14, 1968 was received by the Bank if the Bank had appropriated payments received to the indebtedness at that time. In
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fact the Bank continued revolving the account up to August 22, 1969. The result was that there was indebtedness then outstanding of $24,700.00. This procedure would indeed in my opinion have been improper if the guarantee had been determined in August 1968, but I have expressed the opinion that it was not then terminated. That being so, it follows in my view that the Bank was justified in continuing to revolve the account as it had been doing and in accordance with general banking practice.
We were referred to a number of authorities relating to appropriation of payments received by a creditor, which I have considered. I find nothing in them which indicates to me that the Bank was wrong in appropriating the payments received to the earliest notes—see, 8 Halsbury, 3rd ed., pp.215, 16—and, as I have said, I believe the Bank was justified in revolving the account up to August 22, 1969, the governing consideration for the date when liability was determined under the guarantee. I conclude therefore that this second ground of appeal is valid and must be given effect.
I am satisfied also, for the reasons stated by Mr. Justice Cooper, that the $1,000 note signed by the appellant as collateral to a chattel mortgage was an outstanding liability of Mr. Dickson.
For all these reasons I would dismiss this appeal with costs.
Appeal dismissed with costs.
Solicitor for the appellant: Stewart Mclnnes, Halifax.
Solicitor for the respondent: David R. Chipman, Halifax.